Random Musings

Periodically, I post my thoughts on current news or recent postings adding my slightly irreverent take on the events and a sometimes offer a slightly contrarian view. So follows the current installment.

Observation #1 – MET

This week, my allocation from MET’s spin of BHF arrived. In layman’s terms, Brighthouse is a domestic play while MET has both domestic and international operations. Personally, I viewed the logic as being a way to strengthen their hand (MET) in the ongoing court battle with the US regarding the SIFI designation -a view not presented in any interviews I saw. Once trading began, it was widely panned as a lackluster performance. Now this was a spin not an IPO, my take was it was aggressively valued – meaning (in theory) greater value was retained by the mother ship. What garnered my wrath was the incompetence MET exhibited with the spin.

First the costs associated with the spin were underestimated. This requires consent from bondholders to modify debt covenants (for a fee) with the alternative being selling common stock to attain appropriate debt ratios (dilution). Secondly, a special meeting has been called (more costs) to vote on dividend payment tests included in the corporate charter. The press release states:

These changes would avoid potential dividend and common stock repurchase restrictions which could occur as a result of the August 4, 2017 spin-off of Brighthouse Financial, Inc.

Why was this issue only identified post spin? This gross mismanagement has placed MET into my Penalty Box and one has to wonder whether a meeting should be called to replace the CEO and Board?

Observation #2 – NUE

Sure Dividend analyzed Nucor recently, but his usual precision was (in my opinion) lacking. Invoking “Trump” in the headline was bound to get visits and his ‘Take a pass’ recommendation hit the mark but the review missed in a few areas:

The claim of dumping is certainly an allegation yet no part of his analysis was to drill down on the validity of this claim. Such as a strong US dollar. Or the findings of the WTO.

He does address electricity as being a significant cost component to the manufacturing process but fails to note that they entered into a 20+ year contract with Encana (ECA) for natural gas in 2012. Any failure to perform (deliver) could be detrimental to NUE’s margins.

Lastly in a dent to NUE’s dumping claims, their 2016 JV with JFE (JFEEF) to build a Mexican factory to supply the auto industry has a hollow ring to it. As in, Who’s really doing the dumping?

Observation #3 – DIS

While roaming the channels this morning I came across a segment on Fox (FOX) about how to invest despite the troubles in North Korea. One talking head said Disney citing their theme park exposure was insulated from it. Really? Perhaps he ignores the fact that 18-20% of US Disney visitors are foreign. How would this be impacted? What would the traffic count (or currency repatriation) be like in China? What about travel to Paris or Tokyo? Just one more reason why Fox is not my choice for news.

This is the time of the month that results in added scrutiny on various levels. Not so much on the strategy, but on events that have the ability to impact my investments. With July going to the wire with seven dividends being paid Monday. It will likely be Wednesday when I get the final results and my performance will probably hinge on the exchange rate. Which triggered my random thought process – which at times is scary.

Observation #1

The USD has been weakening as I reflected on in a prior post. Japan faced a mini-crisis vis-à-vis North Korea on Friday. Previously, in such times, the dollar would strengthen while the Yen weakened. This time, it was the Euro that strengthened versus the Yen.

Observation #2

With a weaker USD, gas prices have pretty much increased in inverse tandem as world oil is priced in USD (reserve currency, etc.) Although the weaker dollar should be good for exports, how long until inflation begins its’ ascent?

Observation #3

Several companies have reported earnings that missed on revenue forecasts yet beat on profits. While I don’t place significant value on analyst’s opinions, it’s telling that if this trend continues, profits will be next to suffer.

This I expected from regional banks which was why I anticipated a pickup in M&A activity going into the last half of the year.

Observation #4

The Swiss observed that the Franc may be overvalued. Could this be a precursor to another devaluation? If so, to what impact on the USD?

These are some of the reasons why I chose to modify my strategy earlier this month. Not to mention the potential political impacts – or lack thereof. Perhaps a clear US direction will be established enabling us little guys to try to navigate choppy waters.

This is one of the times that another blogger’s post has triggered my (loosely defined) creative juices. The post in question was Lanny’s (Dividend Diplomats) Waste Management analysis. Now I have no disagreement with his conclusion, in fact you could compare the DD Screener to delivering a fastball right down the middle. The only alternatives to a strike are whether the pitch is high or in the dirt.

Personally, I like a little more strategy – the brush back before throwing a curve that nicks the corner. Questions like EPA regulations or NIMBY impact on landfills. Or the number of municipal contracts that are competitive versus monopolistic. Issues obscured by a strict reading of batting and earned run averages.

The jewel in his analysis was:

I was driving around my neighborhood and was surrounded by a few waste disposal service trucks …

Aha! A twist on the old kitchen cupboard investing strategy. You know the drill … identify the companies behind the products you use. I’m not sure of the absolute merits of this strategy, but there is comfort in investing in companies whose products and/or brands are familiar. And it is one I use (to a degree) as well. My assumption being, why not have my spending subsidized by companies I do business with through dividends?

I think I stated earlier I thrive in the obscurities, case in point being that last week I required a new prescription. My meds generally delivered by mail from Humana (HUM). One-off situations are handled by a local pharmacy. In this case I chose Tom Thumb grocery as they accepted Humana insurance and I could wait at the Starbucks (SBUX) nearby. I noticed on my paperwork that Argus Health was used for claim processing. Argus is owned by one of my companies, DST.

There we have it. Humana paid Tom Thumb which paid a processing fee to DST while I paid Starbucks while waiting. Of which HUM, DST and SBUX all will provide a rebate (dividend) to me. Although a topic I’ve mused on before, it is also one I feel never gets old. One can always posit that this level of detail is irrelevant and perhaps it is. But I feel it provides a broader snapshot of the business when inter-relationships are recognized.

Subsequent to the US election, many have pondered the impact to the economy at-large or at a micro level. Consider Cramer’s Trump stocks or the Trigger app as examples. I too have not been immune as I bought into Europe, Canada, Mexico and Australia as presidential comments resulted in temporary pricing weakness. The question remains what – if anything – can be accomplished on his agenda. With healthcare and tax reform fraught with partisan politics, it appears the best option of the remaining campaign promises is infrastructure as on the surface there still is the hope of bi-partisanship. Yet aside from a vague “public-private” partnership, details have been lacking probably due to resources allocated to the aforementioned agenda items.

I was starting to wonder when – not if – and how the big guns would start deploying their cash stash. Most have investors to answer to and it has been a relatively quiet year so far – so it must be time to begin prowling for deals to bake and pots to stir.

First out of the chutes was the kingpin Warren fresh off the aborted Unilever deal. Leaving 3G in his dust, last week he ran one from his playbook that worked before. This time the victim being Home Capital Group which required a cash infusion following a run on deposits. His $C2B 9.0% loan is at better terms than the one currently in place provided by the Healthcare of Ontario Pension Plan. He’s also getting a discounted share price on a stake that could equal 38%. The advisors were RY and BMO in which I’m long both. As an aside … if the US dollar weakens further, profits could be booked on the FX angle as well.

Then only this morning he announced a 9.8% stake in Store Capital. This one should provide support for REITs in general while (at least on paper) be an investment that meets his standards for playing nice.

This morning brought the announcement that Dan Loeb’s Third Point has amassed a 1.3% stake in Nestlé. This appears to be a ploy to pressure the company to create ‘shareholder value’ by shedding assets and taking on debt. It could be argued that Nestlé’s stake in L’Oreal is a slight hedge against commodity pricing and their conservative nature is an asset rather than liability. I see this as more of an attempt at greenmail with minimal risk. If pundits are correct, the Swiss Franc should get stronger versus the US dollar this year. If so, even without spurring corporate change, profits could be booked on the currency.

In today’s most twisted play, the title goes to Tiger Global who reportedly have shorted Tesco plc while being long Amazon. Not a bad call with Amazon’s Whole Foods announcement last week hurting grocery retailers. But if the FT report is correct and this position was initiated in January, one has to wonder if they were privy to inside information? Especially when initiated anonymously through an offshore entity?

I’m rarely at a loss for my weekly observations – especially post inauguration – with this week being no exception. Without further introduction, I’ll dive right into current headlines and my take on the impact to investors.

Every now and again events are thrown our direction which necessitate a change. Being one who abhors change, I tend to procrastinate until the absolute last minute. I knew the drive in my laptop was on its’ last legs a year ago when I bought a new one. Last week it bit the dust. I did perform regular backups so data loss was minimal. What loss exists is not due to Wanna Cry but their evil twin, Micosoft (MSFT). Though I have an Office license, my use (legally) of an upgraded version resulted in the inability to perform a backward migration. It appears my best recourse is to purchase an upgrade. My frugal nature has an issue with this solution (being held hostage?). Meanwhile, seeing if Google fills the void. I did add a sheet to my Dividends spreadsheet (Div Dates) which – assuming I get the hang of conditional formatting – has the potential of automating my watch list.